Announcement Of Permanent Bailout Fund For Europe May Have To Wait Until Germany Decides Its Constitutionality

The approval by Germany of the European Stability Mechanism (ESM) is the event that has the investor world holding its breath. Many expect European Central Bank (ECB) head Mario Draghi to make an announcement on September 6 that the ECB will intervene to ease credit conditions for Spain and Italy.

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But that announcement may not come until Germany makes up its mind about the constitutionality of the ESM. The ESM is designed to replace the temporary mechanism known as the European Financial Stability Facility.

The ESM would put into place a permanent bailout fund for the Eurozone. One of the primary sticking points is whether the fund is compatible with the German constitution.

Germany’s Bundesbank has been and still is opposed to the use of bailout funds but its dissenting vote is expected to be overruled. The ECB’s Draghi announced on August 2 that a bailout program would be forthcoming. The comment led investors to believe a plan would be revealed at the next policy meeting.

But the ECB then countered that thought, saying the Governing Council had not yet discussed a plan and that reports to the contrary were misleading.

Germany’s Constitutional Court is battling lawsuits by German lawmakers that the ESM is unconstitutional. There are only €240 billion left in the temporary fund. Germany’s finance minister warned that further delay would significantly exacerbate the debt crisis.

As for the US, the uneven strength in the economy could possibly be strengthened if the Fed intervenes and does so effectively. The stronger the US economy, the less effect Europe's problems will have. Europe is the world's largest economy but the stronger the US economy, the greater the possibliity of turnaround across the globe.

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